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Academic medical centers (AMCs; i.e., teaching hospitals) play a vital role in the U.S. health care system by pursuing a four-part, synergistic mission of clinical care, research, education, and community health. Historically, AMCs have used margins from clinical care to subsidize the cost of the other three missions. As a result, the clinical cost structure of AMCs is higher than other hospitals. The study by McCue and Thompson in this issue of Academic Medicine identifies certain factors (such as Medicaid payer mix) that are associated with the financial success of AMCs. For national health care reform to be successful and for health care to be affordable, all providers across the United States, including AMCs, must aggressively identify and implement opportunities to make care better and more efficient. Policies that shape national health care reform must account for AMCs' higher cost structures. If policy makers ignore these higher cost structures, the ability of AMCs to provide highly specialized services, to care for vulnerable populations, to advance knowledge through biomedical research, to educate the next generation of health professionals, and to improve community health will be at risk.

Academic medical centers (AMCs; i.e., teaching hospitals) play an enormously important role in the U.S. health care system. They are often the clinical courts of last resort for very sick patients. They are the site of clinical education for the next generation of physicians and other health care professionals. They are the setting of the biomedical research that has led to many of the diagnostic and therapeutic tools used in modern medicine. These institutions also provide highly specialized services (such as transplants and burn care) not generally available at other institutions in the health care system. Lastly, these hospitals are an important part of the social safety net in our country; although AMCs represent only approximately 5% of the acute care hospitals in the United States, they provide more than 40% of the care to the uninsured (because of their size, location, and humanitarian spirit).1

As national health care reform moves forward, new and changing policies must continue to support and advance the essential missions of teaching hospitals. This does not mean that AMCs are or should be immune to the enormous pressure to improve the quality of care while slowing the rate of rising health care costs. On the contrary, AMCs must work aggressively and play a leadership role in identifying and implementing opportunities to improve the value of care delivered to the American people. Innovative approaches to payment policies should be designed to support and advance these efforts. These policies must, at the same time, take into account the higher cost structures of AMCs that result from the important public goods they provide—goods that are not financially self-supporting. Federal and state policy makers must strive to create a competitive landscape in which AMCs can compete effectively in the future health care system while continuing to provide these vital societal goods.

AMCs rely on their operating margins to advance their missions through investments in information technology, equipment, facilities, and innovative new programs. If future federal and state policies unfairly destabilize the finances of AMCs (as the Balanced Budget Act of 1997 did more than a decade ago2), the ability of these institutions to educate, innovate, and provide care will be compromised. Such a situation could force AMCs to change in ways that many would agree is undesirable. Changes could include reducing or eliminating certain lines of research, one or more educational programs, or social commitments to caring for the poor and underserved.

In a report that appears in this issue of Academic Medicine, McCue and Thompson3 stratify U.S. AMCs by their financial performance into “high-cash-flow” or “low-cash-flow” hospitals. They find that high-cash-flow hospitals, in comparison with low-cash-flow hospitals, are larger, provide more complex care, serve fewer Medicaid-insured patients, and receive higher reimbursement and more prompt payment. The authors find no relationship between financial performance and expense per adjusted discharge.3 This study highlights several environmental factors (such as Medicaid payer mix) that have a major impact on, and may be predictive of, AMC financial performance.

Mission-Related Costs of AMCs

The Commonwealth Fund's Task Force on Academic Health Centers examined mission-related costs in its 2003 final report.4 In that report, an analysis by the Lewin Group showed that total unadjusted cost per case was 63% higher at AMCs compared with urban community hospitals. After adjusting for differences in wages, case mix, and mission-related costs (e.g., standby capacity [the capacity to respond to an influx of patients with severe burn injuries], research, and medical education), the costs of AMCs and urban community hospitals were nearly identical. Of the unadjusted 63% cost differential, 23% was related to wage and case mix differences, whereas mission-related costs represented 40%. These mission-related costs comprised standby capacity (45%), medical education (42%), and research (13%). Clearly, these public goods, which generate the extra costs, play an important role in the cost structure of AMCs. Historically, clinical income has supported research, medical education, and standby capacity; going forward—in the absence of a new alternative revenue stream—these will need the continued support of clinical reimbursements from health insurers.

Payer mix risk

AMC revenues are highly dependent on the populations they clinically serve and on the mix of insurers that cover these populations. Historically, federal and state payers (Medicare, Medicaid) reimburse at significantly lower rates than private payers, and most states make available little or no additional reimbursement to providers for the care of the uninsured.

Thus, private payers and the employers who pay their employees' premiums are clearly subsidizing the underpayment by public payers and the costs of caring for the uninsured. As a hypothetical example, if public payers cover 80% of provider costs and insure half of a hospital's patients, then private insurers must pay 120% of their enrollees' cost for the hospital to break even and 130% of these costs for the hospital to generate a 5% operating margin. (It is no surprise that McCue and Thompson report that AMCs serving a higher percentage of Medicaid patients performed worse financially.) Few in the business community seem to be cognizant of the fact that their premiums are not only covering the costs of their own employees but also financing this public payer shortfall. If business leaders did connect these dots, they would likely advocate much more vocally for Medicare and Medicaid rates that adequately cover the cost of care for beneficiaries at AMCs and other providers. The business community would probably be better off if health insurance premiums were reduced to pay only for the cost of employees, if Medicare and Medicaid payment rates were raised to cover the costs of those programs' beneficiaries, and if a broad-based tax increase were passed to finance these rate increases.

To illustrate, payer reimbursement at Massachusetts General Hospital ranges from about 60% to 70% of cost from MassHealth (Massachusetts' Medicaid program) to approximately 150% to 200% of cost from a private payer that has small market share in the Boston area. Massachusetts General Hospital's operating performance can fluctuate significantly when only minor shifts in the distribution of patients falling into these various payer categories occur. A reimbursement system that provided a more consistent level of payment by all payers would be highly desirable as long as the payment rate enabled Massachusetts General—and all AMCs—to generate adequate margins. Hospital administrators (including those of AMCs) were fearful during the national health care reform debate that a public insurance option for the uninsured would ultimately drive private insurance rates down to the level of Medicare and Medicaid, which would have caused financial calamity within their institutions.

Service mix risk

AMCs are also subject to reimbursement rates that differ drastically by type of service and condition. Generally, more complex procedural services are reimbursed above cost (such as outpatient radiation therapy and inpatient neurosurgery), whereas other services (such as outpatient psychiatry) are reimbursed well below cost. In the accompanying report, McCue and Thompson show that AMCs caring for more complex patients performed better financially. The variation in rates by service is in no way related to the clinical value of these services either to individual patients or to the health of the public. This variation in payment rates by service causes dramatic distortions in the services offered and marketed by providers. For example, many hospitals across the United States are aggressively trying to grow their cancer services, in part, to take advantage of the high margins currently available for chemotherapy administration, radiation oncology, surgery, and imaging. Regrettably, relatively few hospitals are doing the same for mental health services. Hopefully, hospital payment systems will evolve over time such that consistent margin opportunities are available across all services and conditions. Such consistency would help reduce the mismatch between (1) the capacity in the hospital industry to care for different conditions and (2) the health care needs of our society. Of course, in this idealized payment environment, attention to the appropriate utilization of services would still be required.

Implications for Health Reform

As the United States enters the second year of the implementation of the Patient Protection and Affordable Care Act, AMCs, like other providers, should be challenged to deliver even higher-quality care at a more affordable cost. The nature of this challenge must, however, recognize both the important role AMCs play in the U.S. health care system and the unique costs they must bear. Under the Medicare shared savings program, accountable care organizations (ACOs) will have incentives to deliver high-quality care to beneficiaries at lower cost.5 The regulations that shape this program must give AMCs a fair chance at succeeding as ACOs and as referral centers that provide tertiary care to the patients of other ACOs.

All ACOs should receive rewards for redesigning care and reducing unnecessary utilization; however, the recently released proposed regulations issued by the Center for Medicare and Medicaid Services (concerning the Medicare shared savings program and ACOs) include several provisions that will make it difficult for AMCs to compete fairly and effectively in the future.6

One of these proposed regulations is to include direct and indirect graduate medical education (GME) Medicare payments to teaching hospitals in the calculations that will determine whether an ACO has been successful in reducing Medicare expenses.6 This proposed measure means that ACOs that do nothing to reduce hospital utilization but merely steer Medicare patients away from AMCs to other hospitals will be rewarded with possible incentive payments. These GME payments were designed to cover Medicare's share of the costs of training the next generation of physicians and the costs of the associated clinical environment. To not adjust for these payments would be to create an unlevel playing field for teaching hospitals by intermingling the payments for clinical care services with the policy payments that are meant to support the unique education mission of AMCs, which other hospitals do not undertake. Further, not adjusting the GME payments also has the potential to seriously compromise AMCs' four-part mission of education, research, clinical care, and community health because if Medicare patients are admitted to other hospitals, the critical indirect and direct GME payments that sustain these missions will decrease. And perhaps most importantly, this proposed provision undermines the goal of ACOs, which is to change and improve care delivery, not to “cherry pick” among hospitals.

Another troubling provision for AMCs in these proposed regulations is the method for determining whether ACOs have achieved their savings target. Each ACO's Medicare expenses in the shared savings program will be compared with its own historical expenses, adjusted by an absolute dollar (not percentage) increase nationally.6 This means that ACOs that have higher baseline expenses for legitimate reasons (e.g., higher local wages, treating poorer and sicker patients) will have to manage their populations with lower percentage trend increases than ACOs with relatively lower baseline expenditures in order to perform as well in the program. This proposed scheme will obviously disadvantage AMCs that operate in regions with higher wages and/or that attract poorer and sicker patients.

These are but two examples of the many policy decisions under national health care reform that will have a major impact on the future of AMCs and their ability to advance their missions and provide vital public goods. Hopefully, AMCs will rise to today's challenges and redesign care and reduce unit costs in an aggressive attempt to make care more affordable. Simultaneously, I hope that policy makers will give AMCs a fair chance to pursue their critical work and continue to serve the community by providing care for sick and needy populations, innovating and discovering the cures and preventions of tomorrow, and educating the future health care workforce.

Acknowledgments:

The author would like to thank Dr. Timothy Ferris, Dr. Gregg Meyer, and Dr. David Torchiana of Massachusetts General Hospital and the Massachusetts General Physicians Organization as well as Dr. Joanne Conroy and Ms. Karen Fisher of the Association of American Medical Colleges for their very helpful comments and suggestions.